Codexis, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; comparisons are with Q1 2014 unless noted. Codexis develops biocatalysts and protein-engineering technology, primarily for pharmaceutical and fine-chemicals markets.
Financial performance and liquidity
| Metric | Q1 2015 | Q1 2014 / comparison |
|---|---|---|
| Revenue | $6.8 million | $7.1 million; down 4% |
| Operating loss | $5.5 million | $6.4 million |
| Net loss | $5.6 million; $0.14 per share | $6.4 million; $0.17 per share |
| Operating cash flow | $(3.8) million | $(2.4) million |
| Cash and cash equivalents | $22.2 million at March 31 | $26.5 million at December 31, 2014 |
| Working capital | $15.8 million | $19.3 million at December 31, 2014 |
| Total assets / equity | $41.4 million / $21.6 million | $48.1 million / $26.3 million at December 31, 2014 |
Revenue comprised $3.1 million in biocatalyst product sales, $2.2 million in research and development revenue, and $1.5 million from revenue sharing. Product-sales cost fell to $1.5 million from $2.5 million; the implied product gross margin was approximately 53%, versus 15% in Q1 2014. Research and development expense was $5.3 million and selling, general and administrative expense was $5.6 million. The filing reports no debt balance; current liabilities were $11.9 million and long-term liabilities were $7.9 million.
Material changes and business developments
- Total revenue decreased $0.3 million, mainly because Exela revenue-sharing income fell 22% to $1.5 million. The argatroban formulation patent expired in June 2014, permitting generic competition; management expects this revenue may decline further.
- Product sales rose 3%, and research and development revenue rose 2%, including $0.5 million of quarterly GSK license-fee recognition. Lower product costs reflected a mix favoring higher-margin products.
- Operating expenses fell 8% overall. SG&A decreased 9%, partly because Q1 2014 included costs related to selling the Hungarian subsidiary. Q1 2014 R&D also included a $0.8 million gain on that sale; excluding the gain, R&D expense declined year over year.
- Cash fell $4.3 million during the quarter. Operating cash use increased, in part because of payments of prior-period accounts payable and accrued liabilities. Q1 2014 investing cash flow included Hungarian-sale proceeds and investment maturities that did not recur.
Outlook, risks, and contingencies
- Management said existing cash and cash equivalents should fund operations, planned capital spending, and working capital for at least the next 12 months, based on current operations. It noted additional capital may be needed if plans or assumptions change; financing may be unavailable or unfavorable and equity financing could dilute shareholders.
- Under the 2014 GSK license, Codexis received a $6.0 million upfront fee and a $5.0 million milestone payment. It may receive up to $14.0 million in further transfer-related payments over the following 27 months, plus potential project-based payments and royalties. The filing says it did not expect those additional contingent payments, if any, during the first three years. GSK has a termination right after the first transfer stage, subject to a payment in specified circumstances.
- Revenue can fluctuate with customer manufacturing schedules and clinical-trial timing. Codexis also relies on third-party manufacturers for commercial-scale enzyme production; customer purchase orders can generally be revised or cancelled.
- Three customers each represented at least 10% of Q1 revenue; two represented 27% and 22%, respectively. The 22% customer was related party Exela. Customer concentration and dependence on Exela’s product sales are notable risks.
- Operating lease payments totaled $13.4 million in the disclosed schedule. A potential VAT exposure of about $0.6 million was described as more than remote but less than likely and was not accrued. Codexis reported no material litigation, no off-balance-sheet arrangements, and no material changes in other reported risk factors apart from tax-audit risk.
- Management reported effective disclosure controls as of March 31, 2015. A full valuation allowance remained against net deferred tax assets.
Most important facts for investors to verify
- Whether cash burn continues at the Q1 pace and whether management’s at-least-12-month liquidity assessment remains supportable.
- How quickly argatroban-related revenue-sharing income declines as generic competition develops, and how Exela sales perform.
- Progress and payment timing under the GSK technology-transfer agreement, including the conditions attached to contingent payments and GSK’s termination rights.
- Revenue concentration, customer order variability, and the availability and performance of third-party manufacturing capacity.
- Outcomes of ongoing tax examinations and the unaccrued potential $0.6 million VAT exposure.